by Julie Martin
EU lawmakers have nothing to fear from Google’s “double Irish” tax scheme because the purpose of the structure is to avoid current inclusion of US tax, not avoid EU tax, Google’s director of public policy & government affairs, Nicklas Lundblad, told a European Parliament committee investigating the tax affairs of multinationals on November 16.
Lundblad was joined by representatives of Amazon, Barclays Bank, The Coca-Cola Company, Facebook, Google, HSBC, IKEA, McDonald’s, Philip Morris, Anheuser-Busch, and The Walt Disney Company at the hearing, which will be the last meeting of the European Parliament’s temporary special committee on tax rulings, unless the body is successful in obtaining a desired six-month extension for its work.
The scene was reminiscent of a hearing held almost exactly three years ago by the UK Public Accounts Committee (PAC), with lawmakers grilling executives about their companies’ tax avoidance schemes and questioning their morality, and executives asserting that their companies paid all taxes due according to law. As was the case in the PAC committee hearings, the proceedings seemed designed to both uncover the true implications MNE’s complex tax dealings and to generate public support for tougher laws clamping down on MNE tax avoidance.
Catch us if you can
Google’s Lundblad took much of the heat at the hearing. He made it clear, though, that concepts of morality will not the stop Google from taking advantage of mismatches between different countries’ tax laws that give the company tax advantages.
“Moral considerations are best applied by making laws [that,] when you comply with them, seem to have all the moral import that you think they should have. It is at the beginning, the making of the law, [where] you should address those moral issues, so you can uphold the rule of law with due process and make sure that those rules apply equally to all,” Lundblad said.
Lundblad described Google’s now well-known “double-Irish” tax structure, whereby Google Ireland Holdings, an Irish-registered Bermuda-resident company, licenses Google’s overseas intellectual property rights to Google Ireland Limited, an Irish-registered Irish-resident company, that sells advertising across the European Union and elsewhere. Inserted in the middle of the structure is a Dutch entity “that historically meant withholding tax isn’t paid to the Irish tax authority,” Lundblad acknowledged.
According to Lundblad, the purpose of the structure is to avoid current inclusion of US tax, not avoid EU tax, and thus EU lawmakers should not be concerned.
“It is important realize that the entire Bermuda structure does not erase any tax liabilities, it defers only US tax. So, it does not effect the amount of tax paid in the European Union,” he said.
Responding to clearly furious members of the European Parliament (MEPs), that accused Lundblad of lying about the harm Google causes in Europe through it tax maneuvers, Lundblad said that lawmaker’s problems are really with the existing transfer pricing laws’ treatment of intellectual property and that the tax is not “dodged,” as MEPs claimed, but merely deferred.
“The way that the Bermuda money is generated is through the arm’s length transfer pricing model . . . that means that it is the existing transfer pricing agreement [that] you are criticizing, which is fine, because that is something that should be set by government in agreement and under the OECD rules,” he said.
He also said that the Bermuda profit is not taxed “nowhere,” as alleged. “It is not taxed now; I can not predict if it will be taxed if it is repatriated tomorrow,” he said.
Conservative model
Facebook’s Delphine Reyre said that her company’s tax model is “exactly the same as Google’s,” though the situation is “evolving” because of the OECD’s work on base erosion profit shifting and “because of the decisions made in Ireland [on tax] headquarters.”
Reyre called her company’s tax model a “conservative model” that “everyone was using” when Facebook made the decision to begin operations abroad after five years in business. “These are the methods that are used in order to be able to work well on an international level . . . and that is exactly is why we have our intellectual property offices in the Cayman Islands,” said Reyre, who is Facebook’s director of public policy in Southern Europe.
Reyre’s said that Facebook’s tax structure does not affect any countries in Europe except for Ireland, where it is completely tax compliant. “The difficulty is that the United States taxes intellectual property all over the world, so companies therefore are encouraged to find a neutral location [for IP],” she explained.
Michael Theurer, a liberal German MEP and co-rapporteur of the committee, countered that EU firms are in fact disadvantaged because, even though taxes may one day be paid in the US, “until then, the cash flow will stay untaxed and this can then be used win market shares that would put competitors into disadvantage.”
Theurer and Committee Chair, Alain Lamassoure, a French Christian Democrat, said that more study is needed to determine if Google and Facebook’s tax structure has other damaging effects in the EU and also the extent to which it harms US taxpayers. Lamassoure said he has asked the EU Conference of Presidents to extend the committee’s mandate for an additional six months to answer this question and other outstanding questions.
MEP also argued that large multinationals have an unfair competitive advantage over small and medium sized domestic entities that are unable game the international tax system to achieve lower tax rates.
According to Lundblad, though, smaller companies are also taking advantage of the rules. “We see many of the fast growing so-called micro-multinationals now using exactly the same tax systems as we are using, so they are paying the majority of tax on the products they sell across the globe in the their home country,” as opposed to the location of sale, Lundblad told the committee.
Despite being asked the question by MEPs several times, Lundblad would not answer directly whether Google remunerated tax advisers on a contingent basis depending upon how much tax was saved. He also did not directly respond to MEP’s question about whether Google supported public release of transfer pricing country-by-country reports.
Iain MacKinnon, tax director at HSBC, was the sole witness to express support for rules extending pubic country-by-country reporting to all MNEs. In Europe, only banks are now subject to public country-by-country reporting.
Unlike all the other witness, Philip Morris International Vice President Tax, Werner Schuster, said he supported a common consolidated corporate tax base (CCCTB) with a single tax rate to be applied throughout Europe. Such a rate should be about 20 percent, he said. Schuster added that combining patent box legislation with a CCCTB did not make any sense because it would prevent the correct allocation of income.
Schuster also joined the other witnesses in arguing that public country-by-country reporting should not be extended to all MNEs operating in Europe and in expressing support for laws requiring mandatory and binding arbitration of EU tax disputes.
Also testifying were Monique Meche, Vice President, Global Public Policy, Amazon; Mark Hubbard, Global Head of Tax, Barclays Bank Group; Robert Jordan, Vice President, General Tax Counsel, Coca-Cola Company; Krister Mattsson, Head of Corporate Finance, Insurance, Tax & Treasury, IKEA Group; Irene Yates, Vice President, Corporate Tax, McDonald’s Europe; John Stowell, Sr. Vice President Tax, The Walt Disney Company; and Malte Lohan, Global Corporate Affairs Director, Anheuser-Busch InBev SA.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
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